How Much Should Retirees Have Invested In The Stock Market? | Bankrate (2024)

The stock market has been on a tear for much of the past decade, with annualized returns of about 12 percent through the end of July 2023. At the same time, interest rates have hovered near record lows over the past 10 years, which may have caused stock allocations to increase in retirees’ portfolios as investors chased higher returns in the stock market.

So how much should you have invested in stocks once you’re retired? Here’s how to think about asset allocation during retirement and the risks of having too much allocated to equities.

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Asset allocation

Investors have typically invested their retirement portfolios in assets based on the amount of time they have remaining before they plan to retire. An investor with decades left to work before retirement will typically have a higher allocation of stocks in their portfolio because stocks offer higher returns and they have plenty of time to recover from short-term volatility.

As one gets closer to retirement, the portfolio allocation shifts toward safer investments such as bonds or other fixed-income securities because you’re closer to the time when you’ll need the money for various living expenses. You sacrifice the returns offered by stocks for the safety offered by bonds. But the exact percentage of stocks or bonds to hold can be tough to nail down.

Traditionally, a simple formula of 100 minus your age was often used to roughly determine the amount your portfolio should have allocated to stocks. For example, if you were 70 years old, you’d have about 30 percent allocated to stocks.

“That formula is generally a good place to start,” says Keith Beverly, chief investment officer at wealth management firm Re-Envision Wealth. But Beverly says the exact number will depend on a variety of factors such as the risk profile of the individual, the economic cycle and the types of stocks a portfolio holds.

Investors aged 70 and older had about 42 percent of their portfolios allocated to stocks at the end of 2022, according to a Vanguard report on retirement plans it oversees.

Target-date funds

Many investors have essentially outsourced the asset allocation decision by electing to use target-date funds in their portfolios. These funds are managed with a set retirement date in mind, gradually shifting the portfolio’s assets toward safer investments such as bonds as the target date gets closer.

But target-date funds can have higher stock allocations than you might expect. The Vanguard Target Retirement 2025 Fund (VTTVX) has about 56 percent of its assets in stocks as of August 9, 2023, well above what’s suggested by the “100 minus age” formula. The Vanguard Target Retirement 2035 Fund (VTTHX) has about 72 percent of its assets in stocks.

Lazetta Rainey Braxton, co-CEO at financial planning and wealth management firm 2050 Wealth Partners, says today’s retirees may need to hold more stocks than previous generations in order to ensure their portfolios last for the long term.

“I understand that retirees may be a little hesitant about risk – the question is how much can they afford to take, knowing that they’re going to need the growth,” Braxton said.

A 70-year-old investor who holds 30 percent in stocks and 70 percent in fixed income may struggle to meet their spending needs if they live into their nineties, Braxton says. “Is the (fixed) income portfolio generating enough money to carry another two decades? The answer is typically ‘no’.”

Stock market risks during retirement

Both Braxton and Beverly agree that there are risks associated with having high stock allocations during retirement, but the right amount will vary from one individual to the next. A retiree who is able to live comfortably on Social Security and income from a pension may be willing to be more aggressive in their portfolio, with the goal of passing on their wealth to the next generation.

However, if you rely on your retirement portfolio for income, having a high stock allocation increases the possibility that the money won’t be there when you need it to meet living expenses. Stock prices are volatile and you could be forced to sell during a market downturn if you need the money.

Beverly suggests seeing how your portfolio would perform in a worst case scenario as a way of determining if you have your asset allocation approximately right. Look at whether you could meet your spending needs if stocks fell 30 percent or more, as they have plenty of times throughout history.

“Once you get comfortable with the worst case scenario, then you know that’s likely the right portfolio for you,” Beverly says. Otherwise, you may need to adjust your portfolio to a more conservative allocation by increasing bond exposure, he added.

Higher interest rates create an opportunity

Interest rates have risen significantly in the past couple of years as the Federal Reserve hiked rates as part of its efforts to slow the economy and tame inflation. The increase in rates has made bonds more attractive than they’ve been in some time, potentially creating an opportunity for retirees to de-risk their portfolios.

Investors have a chance to lock in higher yields of four or five percent, which is only slightly below long-term stock market returns, Braxton says. The bonds come with a lot less risk than stocks, making it a great time to diversify your portfolio between the two asset classes, she added.

Beverly also sees an opportunity for investors to get more defensive. Retirees should favor bonds in the current environment and more conservative investors in particular should have portfolios tilted toward fixed-income investments, he said. Stock allocations can also be more cautious by focusing on defensive industries like consumer staples and utilities.

Bottom line

The right stock allocation for retirees will vary based on an individual’s circ*mstances, but should generally be decreasing as you age. Consider working with a financial advisor to stress test your portfolio and understand how you’d fare under a worst case scenario. Now may also be a good time to increase fixed-income investments to take advantage of higher interest rates. These investments come with less risk than stocks and can help generate much-needed income during retirement.

How Much Should Retirees Have Invested In The Stock Market? | Bankrate (2024)

FAQs

How Much Should Retirees Have Invested In The Stock Market? | Bankrate? ›

While a five-year recovery may seem alarming, keep in mind that many retirees do not have all their investments in the stock market. At retirement, we suggest taking a more balanced approach, with an allocation of 40% to 60% in stocks.

How much should a retiree have in stocks? ›

Key Takeaways: The 100-minus-your-age long-term savings rule is designed to guard against investment risk in retirement. If you're 60, you should only have 40% of your retirement portfolio in stocks, with the rest in bonds, money market accounts and cash.

Should a 70 year old be in the stock market? ›

Conventional wisdom holds that when you hit your 70s, you should adjust your investment portfolio so it leans heavily toward low-risk bonds and cash accounts and away from higher-risk stocks and mutual funds. That strategy still has merit, according to many financial advisors.

Should a retired person invest in stocks? ›

You might have switched to the spending phase of your retirement plan, but that doesn't mean you shouldn't invest any longer, or plan for market volatility. Investing is a smart financial move to make regardless of what stage you're at in life.

How much cash should a retiree have in their portfolio? ›

You generally want to keep a year or two's worth of living expenses in cash in retirement. Not having enough cash could force you to sell your investments at a loss, while stockpiling too much cash could cause you to miss out on further investment growth.

How many people have $1,000,000 in retirement savings? ›

How Many People Have $1,000,000 in Retirement Savings? According to Fidelity's Q3 2023 report, about 378,000 people had more than a million dollars in their 401(k)s.

What percentage of retirees have $2 million dollars? ›

According to EBRI estimates based on the latest Federal Reserve Survey of Consumer Finances, 3.2% of retirees have over $1 million in their retirement accounts, while just 0.1% have $5 million or more.

At what age should you get out of the stock market? ›

There are no set ages to get into or to get out of the stock market. While older clients may want to reduce their investing risk as they age, this doesn't necessarily mean they should be totally out of the stock market.

Should retirees pull out of stock market? ›

Over the long term, stocks outperform bonds. So, stock market investments should be one component of a plan you use to prevent your savings from running dry before the end of a retirement that can last 20 or 30 years or longer.

What is a good portfolio for a 75 year old? ›

Age 65 – 70: 50% to 60% of your portfolio. Age 70 – 75: 40% to 50% of your portfolio, with fewer individual stocks and more funds to mitigate some risk. Age 75+: 30% to 40% of your portfolio, with as few individual stocks as possible and generally closer to 30% for most investors.

Where is the safest place to put your retirement money? ›

The safest place to put your retirement funds is in low-risk investments and savings options with guaranteed growth. Low-risk investments and savings options include fixed annuities, savings accounts, CDs, treasury securities, and money market accounts. Of these, fixed annuities usually provide the best interest rates.

What is the best investment for retired person? ›

Dividend Stocks

For low-risk investments suitable for retirees and older investors, Rawitch recommends high-dividend blue-chip stocks. "These stocks offer stability and regular income," he says. "By conducting thorough research, it's also possible to find undervalued stocks with above-average dividends.

How much stock is too much in retirement? ›

It may make sense to hold a percentage of stocks equal to 110 or 120 minus your age. You should consider other factors in your investment strategy, including the age at which you want to retire and the amount of money you think you'll need.

What is the ideal amount of money to retire with? ›

By age 40, you should have accumulated three times your current income for retirement. By retirement age, it should be 10 to 12 times your income at that time to be reasonably confident that you'll have enough funds. Seamless transition — roughly 80% of your pre-retirement income.

What is the best portfolio allocation for retirees? ›

At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).

How much does the average retiree have in investments? ›

Average retirement savings balance by age
Age groupAverage retirement savings balance amount
45-54$313,220.
55-64$537,560.
65-74$609,230.
75 and older$462,4100.
2 more rows
May 7, 2024

Should I leave my money in the stock market when I retire? ›

Manage Your Retirement Resources Carefully

While retirees should in most cases be in the stock market, it can be so volatile in times of economic uncertainty. It's always wise to secure other ways to maximize your retirement resources so you don't find yourself in an unpleasant situation.

What percentage of retirees have $3 million dollars? ›

Specifically, those with over $1 million in retirement accounts are in the top 3% of retirees. The Employee Benefit Research Institute (EBRI) estimates that 3.2% of retirees have over $1 million, and a mere 0.1% have $5 million or more, based on data from the Federal Reserve Survey of Consumer Finances.

What is the 70% rule for retirement? ›

The 70% rule for retirement savings says your estimated retirement spending will be 70% of your pre-retirement, post-tax income. Multiplying your post-tax income by 70% can give you an idea of how much you may spend once you retire.

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